Cross Border Deals
Cross-border merger and acquisition activity, although notoriously risky, is making a comeback after the brief lull that followed the fivefold increase of the 1990's. In the first quarter, cross-border deals amounted to $75bn which is a threefold increase from last year, according to research firm Dealogic. Well-publicised examples of such deals include, for example, Pernod Ricard's $13bn acquisition of drinks rival Allied Domecq and IBMıs $1.75bn sale of its personal computer business to Lenovo, China's biggest personal computer maker.
Despite the sudden surge in popularity for such deals, cross-border mergers and acquisitions remain enormously high-risk. There are constant reports of companies abandoning plans for foreign expansion, and choosing instead to remain on home soil. UK utility Scottish Power is one such company to have done so: it is selling, for just $9.4bn, the US business it acquired for $10bn in 1999.
Why then, are cross-border deals so popular? There are three main reasons put forward by academics: one, such deals are a quicker and easier way to enter an overseas market that starting from scratch; two, international diversification can stabilise cash flows and make the acquiring company appear less risky to financial markets; and three, expanding into overseas markets increases the scale on which companies can exploit intangible assets and technologies. (These may include expertise and business processes.)
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